Environmental, Social and Corporate Governance (ESG) Management for Information Technology (IT) Industry
In post COVID-19 era, importance of ESG management for IT industry is widely increased. For IT companies, in addition to the purely financial results, stakeholders are also evaluating the firms’ response and performance in the black swan event through ESG criteria:
What ESG Management is for IT Industry?
Environmental: Environmental criteria consider how a company acts in its role as a steward of nature, such as energy use, recycling practices, pollution, and natural resource conservation. The criteria can also be used to assess environmental risks and how the company is managing them.
As many countries shut down activity in the attempt to slow the spread of COVID-19, pictures and technological measure- ments revealed a drastic reduction in air and water pollution. These show a possible future powered by clean energy, workforce transformation, and environmental stewardship.
Social: Social criteria examine how well a company manages relationships with employees, suppliers, customers, and the community. For example:
- Does the company give back to the community, either monetarily or through volunteerism?
- Do the working conditions and practices show high regard for employees’ health and well-being?
- Does the company offer discounts or concessions on its products and services (say, high speed internet) during crisis times?
IT companies’ examples of corporate citizenship abound during COVID-19. Their efforts included donations of funds, medical equipment and technology, and emergency supplies. These are separate from the herculean efforts of keeping their business offerings available that enable the world to stay connected and productive: ecommerce and social media platforms, cloud networks, and online collaboration and education tools.
Governance: Governance criteria are concerned with a company’s leadership, internal controls, executive pay, audits, and shareholder rights. Stakeholders may want to be reassured that a company uses accurate and transparent accounting methods, doesn’t engage in any illegal practices, that stockholders are given voting opportunitiesonimportantissues,thatconflictsofinterestareavoidedwhen choosing board members, and that political contributions are not being made to obtain unduly favorable treatment.
In post COVID-19 era, importance of ESG management for IT industry is widely increased. For IT companies, in addition to the purely financial results, stakeholders are also evaluating the firms’ response and performance in the black swan event through ESG criteria.
Companies have the resources to accomplish exponentially more than individuals, and as a result bear the responsibility to be good corporate citizens. This is widely recognized by investors, customers, regulators, employees, and
corporate leaders.
What IT companies are Thinking about ESG?
A global survey conducted on the importance of ESG for IT companies revealed following results:
- 57% agreed that they must look beyond purely financial growth for achieving
long term sustainable success, - 74% felt it their responsibility to ensure that organization’s ESG policies
reflected the values of their customers, - 45% admitted that they struggled to link their growth strategy with a wider
societal purpose, - 86% thought that IT industry required more regulation and standards in the area of sustainability,
- 79% agreed that their organization’s growth would be determined by their ability to shift to a clean technology economy.
What IT companies are DOING about ESG?
- 26% have significant incorporation of ESG into their strategic planning,
- 34% said climate change is having a high impact on their company’s investment / funding,
- 55% felt that their sustainability experts were very effective,
- 37% believed that their governance experts were very effective.
Why ESG is crucial for IT companies?
Investor Perspective:
Now-a-days, companies are being analyzed and rated by a number of indices and research firms (based on company disclosures, interviews, media sources, and other data sets) which provide ESG ratings and reports for investors to understand a company’s management of ESG issues. Investors will also examine the ESG ratingofanacquisitiontargetwhenevaluatingapotentialtransaction.
Customer Expectations:
Customers not only require IT companies to offer products/services at competitive prices and quality, but are increasingly looking for them to improve their ESG performance.
Social Responsibility and Corporate Citizenship:
Companies have the resources to accomplish exponentially more than individuals, and as a result bear the responsibility to be good corporate citizens. This is widely recognized by investors, customers, regulators, employees, and corporate leaders. However, while many companies certainly support philanthropic and volunteerism endeavors, CEO of every second IT company is struggling to link its growth strategy with a wider societal purpose.
There is also increasing attention on responsible human capital practices. Proposed legislation in the U.S. would require company annual 10-K filings to include a disclosure of workforce demographics, workforce stability, training and capabilities, health and safety, culture and empowerment, and compensation and incentives.
Profitability Correlation:
Environmental and social changes continue to alter the business landscape. Hard-to-plan-for incidents such as COVID-19, climate change events, and cyber breaches are causing businesses high losses from suspension of operations or theft of customer or company data.
Organizations that possess adaptive capacity in response to environmental and social risks will be better positioned to compete and thrive than peers that do not. Prepared organizations will be able to improve the efficiency and resiliency of their business including supply chains, IT operations, and disaster recovery/business continuity plans.
What is the current state of ESG within IT companies?
Increased awareness and appreciation for ESG phenomenon is not fully translated into business practices yet. What IT industry thinks about ESG is very different from what they are actually doing about ESG. IT companies will be asked by investors, employees, and customers to detail their COVID-19 reaction through an ESG lens. But beyond the virus, other catalysts like climate change and social equality are much more long-lasting and illustrate the need for companies to permanently embrace sustained, robust ESG practices.
This is proving to be a challenge for IT companies. Yet COVID-19 represents a sudden and unexpected opportunity for IT companies to review their ESG practices. Perhaps technology leaders will be prompted to increase their ESG efforts, which would have a lasting, positive outcome for all.
IT companies increase ESG practices during COVID-19:
While they still have the opportunity to raise their level of corporate ESG practices, IT companies have shown a glimpse of what this future would look like throughout the COVID-19 timeframe.
Assessing ESG readiness
IT companies can ask these questions to help assess how well they are adapting to environmental and social changes, along with how well their ESG practices are connected to their financial and operational performance.
- How do our investors perceive social and environmental issues?
- Do we have confidence in the data being reported and that it responds to our investors’ concerns?
- Are we ready to respond to tougher customer demands to be more socially responsible and environmentally friendly?
- Do we have ESG controls integrated in our corporate
governance structure? - How can our business grow and simultaneously reduce its carbon footprint?
- Are we investing in the innovation of greener products and services to respond to market needs?
- Are the current risk management systems effective at capturing emerging environmental and social risks and opportunities?
- Is our organization’s reputation at risk for not meeting our customers’ expectations regarding social and environmental performance?
- How would our facilities and supply chain be affected by environmental impacts like extreme weather, water scarcity, etc.?
What ESG Experts Do?
The journey to a sustainable business model that is responsive, adaptive, and resilient can be challenging. ESG experts can help companies navigate the complex and evolving policy, regulatory, and business landscapes to better understand the risks and opportunities related to climate change and sustainability and help them capitalize on the resulting commercial opportunities. ESG experts can help companies build long-term value in a rapidly changing world.
Increased awareness and appreciation for ESG phenomenon is not fully translated into business practices yet. What IT industry thinks about ESG is very different from what they are actually doing about ESG. IT companies will be asked by investors, employees, and customers to detail their COVID-19 reaction through an ESG lens.
This article was first published by Chartered Accountants Ireland at the following URL: https://icap.org.pk/files/per/publications/PA/2022/apr-june/apr-june-2022.pdf
